Microfinancing Deals Can Pull in High Returns

Microfinance deals are not thought of as profitable. However, the high interest paid on microloans makes the deals just that, and more hedge funds and big investors are looking to break into the business, according to BusinessWeek. “This is not a charitable activity,” said Scott Budde, a managing director at TIAA-CREF, which aims to invest $100 million in such deals. “We’re looking to produce competitive returns.” Microloans are in flux, too. As many as half of the globe’s three billion poor people may be eligible for loans—typically just a few hundred dollars—at interest rates that average 31% a year, according to consultancy McKinsey & Co. A report last month by Standard & Poor’s notes that the over $15 billion in mircoloans currently on the books doesn’t compare to the potential of some $150 billion in lending. Microfinance is “emerging out of the acne phase and getting ready for the junior prom,” says Brenton Kessel, president of Abacus Wealth Partners, which has put about $6 million in to the $23 million Unitus Equity Fund, one of the almost 100 investment funds focused on microfinance. Soon even more cash might start heading to the sector. By September, S&P hopes to establish global standards for the business and expects to rate 20 microlenders, which are wanted by retirement funds and others hoping to get a piece of the high returns the sector can offer. “Doors will open” once investors have a better sense of the risk, said Gary Kochubka, director of the emerging markets at S&P. However, some firms are getting involved now. Morgan Stanley packaged small loans worth $108 million from a dozen for-profit lenders into a tradable security with yields of up to 7.7% in May. Two other major industry firms are planning to do the same this year, offering a total of $500 million in securities, S&P states. However, some experts think that rates and returns may fall with competition. Sky-high returns are temporary phenomenon, says Matthew Bannick, who heads Omidyar Network, backed by eBay founder Pierre Omidyar. Bannick figures even investors who are only in the game for themselves will be still be helping microlenders reach more people. “Is it better to serve 100 million poor people and break even or to serve 2 billion poor people and make a modest profit?” he asked. The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.